Saturday, June 21, 2008

Something To Pass the Time

Since its the weekend and there's not a lot going on, let's use this opportunity to toss some ideas around. I've got some questions in mind and I think I want to turn this first question into some sort of contest. I have no idea what I'd give away as a prize so I'll have to think of something and get back to everyone on that. The question has a year time frame though so obviously a year from now we'd check back in and see who fared the best. But, for now, the questions:

Contest Question:
1. If you had to pick only 1 stock to hold for the next year, what would it be?

Non-Contest Questions
2. What is the investment thesis that you are MOST confident of, hands down, regardless of time frame?

3. Of these four alternative energy choices, which investment will yield the best returns over the next 5 years? 'Clean' Coal, Nuclear, Solar, or Wind? (This one's tougher to gauge than you might think, especially with America's uncertain future political environment)

I'll post up my answers after we starting getting some responses/feedback, but I'll just drop a hint that my answer to the first 2 questions both relate to oil.

Thursday, June 19, 2008

Possible Snag for Wind & Solar Plays

Taken directly from,

6/17/2008 02:50pm
US Senate vote blocks extending wind and solar energy tax breaks

- in a 52-44 procedural vote that blocked closure of debate on the bill, Republicans blocked the tax break extension for the second time this week. 60 votes are needed to end debate and move it toward a formal up or down vote."

Will be interesting to see how this plays out and how it might affect Wind & especially Solar stocks. Can they really survive without tax breaks and subsidies?

Adding to Walmart (WMT)

I like the looks of Walmart (WMT) here on this pullback. I added my initial position on the pullback to around $55 on the 50 day moving average just a few weeks back. It's run up and then now its back down testing the 50day ma support again, so I'm adding. I cannot stress enough how this is literally the only consumer name I'm playing (could make an argument for MA & V though). When times get rough, people flock to the cheapest of the cheap, and that's WMT. In my first post regarding WMT i mentioned that their stores are PACKED even at 11pm on a friday night when my friends and I stopped in to pick up some drinks.

If you're going to be long the consumer in any way shape or form, this is the play. The chart is perfectly uptrending, using the 50 day moving average as support; it really speaks for itself, just have a look. Buy WMT on the dips as the tight consumer only gets tighter. This can give your portfolio some good diversification away from energy, tech, and commodities (ie: the things that have been working in this market).

Long WMT (have half my position now & will add more on future dips)

Get Your Fertilizer Limit Orders Ready

It's about that time again.... Time to set the buy limit orders for the fertilizer names. Today marked what I believe is the first day of the next round of profit taking in these names. Now, don't get too anxious right away, we still have a little ways to go in terms of retracement. But, with Potash (POT) receiving a price target upgrade today by analysts at RBC Capital Markets from $300 to $340, we most likely have seen the near-term top. Having been in these names since last August, I've really got a feel for how they trade and have developed a rinse and repeat strategy for selling off half my position at new highs, and then buying back those shares on the retracement. This strategy allows me to maintain a core position at all times while still trading around the ups and downs the name experiences, truly maximizing my profit. Having just seen new highs in fertilizer companies Potash (POT) and Mosaic (MOS), I've taken profits last week and am now waiting for the inevitable pullback. As MOS pulled back 6% today and POT 2%, I believe this next round of profit taking has begun and its time to check the charts to find the best entry points to get back into these names in the coming days or weeks.

First off, in POT, we've seen new highs of around $240, blasting past previous highs of $220. And, that is exactly where we start to look in terms of entry points. Typically, after making new highs, stocks will sell off due to profit taking and consolidation. These retracements often trend down to the past highs, where they find a level of support. Those previous highs marked places of previous resistance which have now become future support. As you can see from the chart, the green line drawn across $219 or so signals the high reached before the one we've just now hit. This is the first entry point and thus I am placing a limit buy at $219 for 1/4th a position. The other 1/4th a position I reserve for the 50 day moving average at or around $205. In terms of stochastics, if you look at the very bottom part of the chart, you will see that each time the stochastics reach oversold conditions around or below 20 (green circles), it has indicated a buying point. Obviously, right now we are very overbought and due for a correction. Thus we must wait for either our entry point at support, or for when stochastics give us the buy signal.

For MOS we have a very similar pattern. It has reached new highs of $160, blasting past previous highs of $144 or so. That level represents our starting point for looking for entries. The green line I've drawn is our immediate entry target, at around $140. This is placed at the past peak which was past resistance and is now future support. I have a buy limit order there for 1/4th a position and the other 1/4th of a position will be placed with an order around the 50 day moving average around $132. Looking at stochastics at the bottom of the chart, we see oversold conditions represent buying opportunities (green circles). So, ideally our entry orders will coincide with stochastics showing oversold conditions around 20. Do note though that with MOS specifically, for whatever reason, it often breaches the 50 day moving average and then trades back up higher, rather than bouncing crisply off the average. This is yet another trend I've noticed if you look at a longer time frame chart. So, that's something to keep in mind when placing your limit orders.

That's all there really is to it. Just set your limit orders and forget about it. Eventually in a few days or weeks, the selloff will trigger your order and you can check back in on the stochastics to gauge how much profit taking is left. Now, keep in mind that these stocks could very well throw logic out the window and continue marching higher without completing the retracement. But, I've found this gameplan to be pretty effective overall.

Liking Steel Here, Especially Siderurgica (SID)

Steel has had a nice pullback here and offers me a chance to finally get back in. I've been monitoring the situation closely because its had a monster run and I keep having to take profits. Not to mention, every pullback could potentially be a breakdown. So, you've got to be on the look out for divergences and overall investor sentiment to the sector. All the steel names look pretty similar on the charts. Most are at or around their 50 day moving averages. So, at the very least, you've got a nice risk reward play set up for a trade or a solid 1st entry point for a longer term position.

Charts not withstanding, I actually like Mechel (MTL) as my favorite steel play. They've got exposure to coking and steam coal, iron ore, nickel, steel and some coal through their mining unit. An added bonus is the fact that they're based out of Russia (and Lithuania and Romania) and it gives you some solid international exposure. But, I'm not adding here yet because the stock hasn't made an assertive move and has been hovering around support. So, I love the company, but the price action is looking a bit weird at the moment and I want to make sure its not breaking down.

While sorting through some other steel charts I saw Siderurgica (SID) and their chart is much more crisp and clean in terms of defined entry/exit points. So, I can get long now and then I already have a clean stop in place. If it breaks below, then its probably undergoing a short-term technical breakdown and is most likely going lower. MTL's chart is a bit conjested right now, while SID is cut and dry. I obviously like SID as well (that's why I was looking at the chart in the first place). So, while I wait for MTL to sort itself out, I'll use SID for my steel play. SID is a Brazilian based steel company so you can already see the direction I'm heading here: steel plays based in emerging markets.

At any rate, here's the chart of SID which offers you a nice play for a trade or investment, whichever suits your style. The green horizontal lines I've drawn in represent support/resistance lines. As you can see, SID bumped up against those resistance lines before eventually breaking through them. Then, after breaking out, the stock usually retraces and re-tests that line which is now future support & past resistance. Each time the stock has done this recently, its served as a solid entry point in terms of risk/reward and clean stop. The trend in this stock is up and should it break below our stop, then we know its breaking down for the near-term. Its up to you as to how conservative/loose you want to be with your stop, but you will want to place it just below the highest horizontal green line I've drawn in (our support line) at around $44 or so.

The rationale behind getting in these names plays out just as before. Global growth continues despite a US slowdown. Global infrastructure is a booming industry, as evidenced by the billions of backlog numerous international infrastructure companies have built up. Additionally, these steel producers currently have some degree of pricing power and are using it to their advantage. If you have witnessed the coal story explode onto the scene as of late, then you should also pay attention to steel. Because, after all, metallurgical coal is all about steel and the two stories are connected in that respect. I'm liking the steel producers in emerging markets simply because they are right smack dab in the middle of the growth and they are supplying those emerging markets themselves (as well as the rest of the world).

long a little SID here to see how it holds up in this shoddy market & will add more once it (hopefully) surges up away from the 50 day. Waiting a bit longer on MTL to see how it holds up here, as it might have possibly printed a double-top in its most recent run.

Wednesday, June 18, 2008

3g iPhone = Huge Margins?

Let me start out by saying: don't worry, this is not yet another 3g iPhone hype post that you can find all over the internet. Instead, this is a post about meaningful implications for AAPL as a stock based on some recent information. Ok, so we all know the 1st iPhone was a semi-success, but now that AAPL will be releasing an even better version, expectations are much higher. The initial hype surrounding the 1st iPhone was about growth. "Oh this will be a huge growth product for Apple..." blah blah. The point is that apparently now not only will the iPhone be a growth story for Apple, but it could also be a huge margins story. Portelligent (through EETimes) are out with research stating that they think the new iPhone will cost as little as $100 to produce. This when the 1st gen iPhone cost around $170 to produce. Note: They haven't actually gotten their hands on a new iPhone and disassembled it. Instead, they've done some channel checks in terms of components to gauge pricing and come up with this sum. Although this can be an accurate ballpark figure, I just want to throw that caveat in there. But, even if that figure is just slightly off, the point is that AAPL will still be seeing huge margins and here's why.

AAPL is Billy Badass when it comes to component pricing. If you're familiar with their tactics, then you know they aggressively buy components to ensure their competitive market advantage. Carl Howe over at The Yankee Group gives a timeline of AAPL's business savvy:

"Apple paid $1.25 billion in 2005 to guarantee flash memory for iPods through 2008; that purchase made it nearly impossible for other flash music players to have competitive supplies and profit margins. Apple reportedly negotiated another similar deal in 2007."
And, Howe made this powerful statement as well:

"In fact, if these numbers are true and the carriers are subsidizing the phone, the iPhone 3G could end up being the most profitable product Apple makes. But more likely, this means that Apple has a lot more pricing flexibility than analysts have given them credit for."
The point is that AAPL will be paying much less for components this time around due to technological/engineering advancements and the bullying approach they take in the component space. The display will most likely cost them half as much this time around. Additionally, AAPL will be getting memory for the phone on the cheap and in turn can sell it to consumers for nearly 5x as much as they got it for. The point is that AAPL has significantly reduced their input costs this time around; even with more/newer components in the phone.

In terms of pricing, the phone will most likely sell for $399 straight up no-contract or $199 with the At&t subsidy for a 2 year contract. These figures already show the huge margins AAPL will be seeing with this product. The At&t subsidy is actually a great thing for AAPL because they will be selling the phones to At&t at full price ($399 or so) and then At&t will take the hit in terms of the subsidy to guarantee they get customers in the door buying the phone and signing up for 2 years of service. Zero risk for AAPL there, they don't take a hit.

So, why is this all important? Well, we all know the iPhone is a growth story for AAPL. What I don't think most people realize is the huge margins AAPL will be seeing with this product. With all the high-tech gadgetry inside this phone, people assumed it would cost a pretty penny to produce so AAPL's margins wouldn't be all that high. Au contraire; it sounds though as if those revenue figures would be massively understated. The Mac computer has been the driving force behind AAPL's success all along as they continue to steal market share and crank out sales of macbooks and mac computers. This is the perfect silhouette for what the iPhone very well could be. Mac computers = high growth + high margins. If the new iPhone follows this same formula, then AAPL could see a meaningful boost to their bottom line come September/October. And, the best part is, At&t will be taking the hit by providing users with the subsidy. This gives the iPhone a very competitive price point and many of the features the first gen iPhone lacked. In the end, all you have to ask is: What is AAPL best at? They create high margin products that people HAVE to have. End of.

Some Good Online Resources for Research

Just wanted to take a quick second to point out some great online research resources for those who might not know about them.
First, I want to point out The Wall Street Journal's Money Flow pages. These pages monitor "Buying on Weakness" in which they list the stocks that are down for the day but have seen the largest inflow of money. They also monitor "Selling on Strength" which shows stocks that are up for the day but have seen the largest outflow of money. Buying on Weakness can be found here. Selling on Strength can be found here.

Second, for those who are not necessarily actively trading in the commodities markets, but still want to know what's going on with oil and natural gas, here's your quick solution. It can be found at Bloomberg on their self-updating Energy prices page found here.

Thirdly, I want to link up Goldman Sachs' Conviction Buy List. Goldman is undoubtedly one of the best i-banks/hedge funds on the street right now, having navigated successfully through the credit crunch and recession (so far). Therefore, you should at least keep tabs on the info they release. Not to mention, the stocks that get added to/subtracted from this list will definitely move based on that news. StreetInsider tracks the list here.

Next, I want to link up MSN Money's Insider Buying/Selling tracker. This page monitors the top 10 largest insider purchases and top 10 largest insider sales in the last 30 days, The list is updated weekly on Friday and is based on Form 4 SEC filings. You can find that here.

In terms of news, you need to keep an eye on certain Economic developments and this calendar sets you up with all the action that will take place during the upcoming week on Wall Street. Its a great resource to have so you know what kind of catalysts are coming that will move the markets. Check it out here.

Lastly, just wanted to post up an Options guide for those who might be newer to Stock Options. They're a powerful and useful tool for investors, but you've got to know how they work and the various strategies you can use. TheOptionsGuide has a very good breakdown of all the various strategies here.

Alright, that's just a few for now, I'll add more as the days go on. Please feel free to add any other worthwhile sites in the comments section!

Tuesday, June 17, 2008 - Check it out

Hey everyone, just wanted to take a minute to point out TraderMark's site: Many of you reading now undoubtedly came here through Mark's site, so you already know what he's up to over there. If you're unfamiliar with his site, he's on a quest to start his own mutual fund and has been cranking out pledges from readers, with this past month being his highest month ever in terms of pledges. This past month, he raised $901k and that brings his total pledges up to $2.5 million. He runs a virtual fund right now via marketocracy and has a solid track record based on his macro investment platform. If you're familiar with mutual fund managers, then think Ken Heebner (CGM Funds) with just a slight twist. He's very transparent, outlining his thought process and investment rationale through the blog. His investment style is very similar to mine and that's how I found him in the first place. Macro investors ftw!

At any rate, just wanted to give him a mention as he's doing a great job and deserves to be running a fund for his track record and the amount of time/hard work he puts into his passion of investing (all while maintaining a normal job as well!). You can pledge by dropping him an e-mail on his page or by posting a comment on one of his posts. If you're not interested in pledging, at least stop by to check out his economic commentary and market thoughts (well worth the read).

You can find his most recent reader pledge update here.

Housing Market Still Sucks... What Else is New?

In the spirit of my post below reminding everyone that we're still in a downtrend, I wanted to point out a post at The Big Picture by Barry Ritholtz. He posts up some staggering statistics taken from RealtyTrac, an aggregator of foreclosure data. In the month of May:

one in every 483 U.S. households received a foreclosure filing during the month of May. This is the highest monthly foreclosure rate since they began tracking foreclosures in January 2005.

And then accompany that info with the following chart. Obviously California, Nevada, Arizona, Colorado, and Florida continue to feel the pain. What's interesting to see is that the problems in Michigan seem to be slowly oozing into neighboring states Indiana and Ohio as well.

To everyone trying to call bottoms: give it a rest. The housing sector is accelerating to the downside. All you have to do is look at the data.

Monday, June 16, 2008

Just a Friendly Reminder: We Are Still in a Downtrend

While we may be due for an oversold bounce near-term, it's always good to take a step back and look at the big picture. Focus on the green trend lines I've drawn in. Until we get a full break to the upside of that trendline on some strong volume, we are still in a downtrend.

Chart: 1 year S&P500 daily

Chart: 1 year S&P500 weekly

Just your friendly neighborhood reminder.